In this article we take a look at real estate investment trust (REIT). A REIT is basically a company that owns, and in many cases runs, income-producing real estate. REITs can own various types of commercial real estate these range from offices, apartment, hotels, shopping centers and warehouses. The rent generated from the properties is distributed to shareholders in the form of dividends.
So unlike normal real estate investing where you buy the property and then either sell or rent for profit, in theory this means the minimum investment is far lower than standard real estate investing
When you own stocks in a REIT, you basically own a small piece of the property, this similar to the stock market where you own a small amount of stocks in a company, so technically you own a small part of the company.
Think of a REIT as a mutual fund for real estate investing.
REITs are present in many countries around the world, most of these countries have their own rules and regulations, here are a few of the US rules for a company – there are others
Be managed by a board of directors or trustees
Otherwise be taxable as a domestic corporation
Be jointly owned by 100 persons or more
Have 95 percent of its income derived from dividends, interest, and property income
Pay dividends of at least 90% of the REIT’s taxable income
Have no more than 50% of the shares held by five or fewer individuals during the last half of each taxable year (5/50 rule)
Have at least 75% of its total assets invested in real estate
Derive at least 75% of its gross income from rents or mortgage interest
Have no more than 25% of its assets invested in taxable REIT subsidiaries
If you want to find out more for the US – The rules for federal income taxation of REITs are found primarily in Part II (sections 856 through 859) of Subchapter M of Chapter 1 of the Internal Revenue Code
There are 2 types of REITs that you should be aware of
Equity REITs
About 90% of REITs are equity REITs. Equity REITs buy, manage, build and sell real estate. The revenues from these REITs come mainly from rental income. The types of real estate properties include residential, retail, office, industrial and hotels.They must distribute at least 90% of the portfolio’s income to its shareholders in the form of dividends.
Mortgage REITs
Mortgage REITs only make up about 10% of REITs. A mortgage REIT lends money to real estate buyers or buys existing mortgages or mortgage-backed securities. The revenue from these REITs come from the interest paid on the mortgage loans.
You can typically earn upwards of 7% from REITs making this an appealing passive income opportunity
Some REIT companies (USA)
Fundrise: Fundrise allows you to invest in commercial real estate online through an eREIT. Their crowdsourcing model sets them apart from a traditional REIT allowing investors to participate in deals for as little as $500. They have a lot oif information to read on their website, I recommend you do.
Vanguard : Minimum investment of $3000 This fund invests in real estate investment trusts—companies that purchase office buildings, hotels, and other real estate property.
If you are looking for others the biggest ones in the US (and some are worldwide) are
American Tower (NYSE:AMT)
Simon Property Group (NYSE:SPG)
Crown Castle (NYSE:CCI)
Public Storage (NYSE:PSA)
Prologis (NYSE:PLD)
In fact wikipedia has a huge list of them at https://en.wikipedia.org/wiki/Category:Real_estate_investment_trusts_of_the_United_States
I would recommend checking out the minimum investment, looking at reviews of the sites and just taking a look at the site to see what you think. For a beginner Fundrise seems a very good safe option to get you started.
Some REIT companies (UK)
Bricklane : Invest from £100 in 2 funds. The Regional Capitals fund returned a total of 15.7% since September 2016, while the newer London fund has returned 10.4%. I invest in both of these since I am in the UK
The following companies are listed on the FTSE
Assura AGR FTSE 250
Big Yellow Group BYG FTSE 250
British Land Company BLND FTSE 100
Derwent London DLN FTSE 250
Great Portland Estates GPOR FTSE 250
Hammerson HMSO FTSE 250
Intu Properties INTU FTSE 250
Land Securities LAND FTSE 100
LondonMetric Property LMP FTSE 250
NewRiver Retail NRR FTSE 250
Primary Health Properties PHP FTSE 250
RDI REIT P.L.C. RDI FTSE 250
SEGRO SGRO FTSE 100
Safestore Holdings SAFE FTSE 250
Shaftesbury SHB FTSE 250
Tritax Big Box REIT BBOX FTSE 250
Unite Group UTG FTSE 250
Workspace Group WKP FTSE 250
British REITs have to distribute 90% of their income to investors. They must be a close-ended investment trust and be UK-resident and publicly listed on a stock exchange recognised by the Financial Services Authority.
My REIT Summary
I have always regretted not getting into property years ago, house prices rocketed in the UK and now I don’y have enough capital but REITs and crowdfunding real estate (which I’ll discuss in another artilce) offer real opportunities to earn some real passive income.
This is my basic point would you rather give £1000 to a bank, earn pitiful 1% interest if you are lucky or invest in something which can return at least 7% – I know which one I pick.